I have seen some nasty things in my decades writing about investing, but the performance of preferred share ETFs over the past decade is uniquely horrible.
A reader recently asked me why preferred shares get comparatively little attention, and had my reason at the ready. While they continue to be reliable producers of dividend income, pref shares are upsettingly volatile in price and thus a pain to own. I decided to check just how much pain and came away surprised.
Two preferred share exchange-traded funds were examined – the $1.6-billion BMO Laddered Preferred Share Index ETF ZPR-T and the $991-million iShares S&P/TSX Canadian Preferred Share Index ETF CPD-T. Both are veterans of the preferred share wars, with track records going back more than 10 years.
The past 10 years have seen all types of markets for preferreds – hopeful, discouraging and a complete horror show. Four of those years featured losses on a total return basis for ZPR, notably plunges of 20.2 per cent in 2015 and 17.4 per cent last year. The year 2021 was a moonshot – a gain of 23.5 per cent. And yet, the annualized 10-year result was a mere 0.2 per cent. Again, these results are total returns with dividends included.
ZPR holds rate reset preferred shares, which adjust their dividend rates every five years to account for changes in the five-year Government of Canada bond yield. CPD holds mostly rate resets, but also perpetual preferreds that behave kind of like a bond with no maturity date. More diversified, CPD has been both better and worse than ZPR. The 2021 gain was 18.7 per cent, the 2022 loss was 18.4 per cent and the annualized 10-year result was 0.5 per cent.
The particularly sad aspect of these numbers is that 10 years is supposed to be long enough for stock market volatility to work to your advantage. There will be down periods over a decade, but they should be well offset with gains. Common shares, the supposedly more risky cousin to preferreds, can reasonably be expected to generate after-fee returns of 4 to 7 per cent over 10 years.
It’s fine to hold preferred share ETFs, collect your dividends and enjoy the tax benefit in a non-registered account over interest income from bonds and GICs. But the price volatility is a confidence-killer. Be prepared.
Two thoughts on alternatives to pref shares: Pick a selection of individual pref shares to hold or, better, get your dividend income from common shares that increase their dividend payments every year or so. That’s the sweet spot for dividend investing.
– Rob Carrick, personal finance columnist
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Algonquin Energy AQN-T: Canadian investors interested in energy stocks have plenty of options. So why is Algonquin worth a look? As David Berman writes, the company’s strategy goes like this: The proceeds from the sale of its renewables assets can be used to pay down debt and buy back shares, bolstering Algonquin’s investment-grade credit rating and its dividend. As a regulated utility, Algonquin could shine. Without the renewables business, the utility will offer investors a simpler and more predictable business that can be easily compared with other utilities.
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Ask Globe Investor
Question: Due to market uncertainties, what is the best route for a short term e.g., one-year investments? Thank you. – Mary D.
Answer: Many interest-sensitive stocks, like REITs and pipelines, are offering high yields at present, but it sounds like you want nothing to do with the stock market. That implies a fixed-income investment and currently there are some good choices.
The safest would be a one-year GIC that is protected by deposit insurance. The best one-year GIC rate, according to Ratehub.ca, is 5.6 per cent from Motive Financial, which is owned by Canadian Western Bank. It’s protected by the Canada Deposit Insurance Corporation.
Several financial institutions offer 5.5 per cent including Tangerine Bank (owned by ScotiaBank), EQ Bank, and Oaken Financial. So, you have lots of choice. – Gordon Pape
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Compiled by Globe Investor Staff